A very short newsletter today, because we are still recovering from my son's weekend wedding:

The couple were married by pastor Edgar Wiens, whose father married the bride's parents.

Bridesmaids were sister and sister-in-law of the bride; groomsmen are friends of the groom.

Presenting Mr and Mrs Stefan and Ivonne Grabowski

11Q2: PTC Returns to the CAD Bandwagon
During last week's Q2 conference call with financial analysts, PTC ceo James Hepplemann revealed that Creo is a problem for the company: "We have the same sales force selling both Creo and Windchill, and the strong demand we've seen for Creo in the first half, clearly takes selling cycles away from Windchill, suggesting we should be thinking about... remedies to what may currently be a capacity limitation to our growth opportunity." Too many sales, not enough salesmen.

He gave further impressions that Creo is a raging success, by noting that a "large Japanese electronics company" dropped SolidWorks and Siemens and standardized on Creo.

The problem is, however, that there are two Creos: the current line-up of PTC's software has been renamed Creo -- the "old Creo," so to say; and there there is the upcoming launch of the "new Creo," the component-ized versions of the old software in new clothes. This means it is not always clear of which software PTC speaks.

PTC expects FY '11 revenues of $1.12 - 1.13 million.

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It was a big deal for PTC to get the HKMC [Hundai-Kia] R&D center contract, but it meant the loss of jobs for some employees in the automotive department of PTC R&D:

Analyst: "On the severance in the R&D area, you mentioned automotive. I wasn't quite clear just kind of what actually you're doing there."

PTC: "When we announced this HKMC contract and the accounting hit we took for it and so forth, many people said, does that mean you're hiring new people? And we said, no, we're going to repurpose. We're going to take R&D spending down."

Analyst: "Is it actually a transfer of employees from you to the customer?"

PTC: "No, no. Think of it is a transfer of employees from largely North America to Korea. But a lot of North Americans don't want to move to Korea, so it became a termination of some employees in North America and hiring of some employees in Korea."

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The threat of the US government shutting down affected PTC's sales to the point that they reduced guidance from 20-25% to 15-20%:

Analyst: "You talked about the federal and the aerospace and defense. And I think you talked about a couple of large deals that slipped, but the fact that you're bringing down the license growth estimate for the year would seem to indicate that it's more than just a couple of slipped deals."

PTC: "We didn't plan for a strong year in federal, aerospace and defense. We're aware of the macro situation, and we planned accordingly. But what did catch us by surprise was a couple of deals that we thought we were going to get. Suddenly in the midst of this 'we're shutting down the government' crisis, nobody wanted to spend any money on anything because they weren't sure what was happening. So these deals slipped; we think we'll get them.

"The aerospace industry, quite frankly, is just fine. It's the federal and defense sector that's under the government spending pressure."

Analyst: "How big is that federal and defense business for you?"

PTC: "Looking back over the last 4 years, U.S. Federal has been approximately 10% of our business. It's Army, Navy, Air Force. It's NASA, it's Department of Energy and the nuclear weapons complex. It's a lot of different programs that have independent customer relationships with us."

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CAD vendors are finding that the Japanese earthquake is not a blow to their revenues, since the damage is limited to a small geographic area:

Analyst: "And then on Japan, you actually look fine there."

PTC: "First, I should cite and just say that we have about 250 people in Japan, and the good news is they were all safe. And some of their families were impacted but we are very pleased with the leadership in Japan and really how people work through it. I think Jim's been there a couple of times, both just before and just after the event.

"There's uncertainty as to what will happen in the next couple of quarters with Japan. But I think long term, it's a very resilient economy and culture. And we'd expect continued growth."

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Windchill is PTC's PLM software, and a new version is coming out soon:

Analyst: "How will Windchill 10 affect sales?"

PTC: "Number one, it reduces the degree of customization. A fair amount of customization has been user interface tweaks and then a fair amount has been functionality gap-filling historically. And with 10, of course, there's a lot more functionality, but more importantly, I think the era of customizing user interface has come to an end. So there should be less customization, therefore, less services, therefore a better license to service mix.

"The second thing that's very important is we should also have faster adoption thereby leading to the next license order, which again, improves the license to service mix over the course of a year or so.

PTC: "I think there was a concern that this launch of Creo was going to hurt our CAD revenue. But the launch of Creo has caused our CAD revenue to explode, and the explosion of CAD demand has hurt our Windchill revenue."

Analyst: "Creo doesn't get released until the summer. You explained that the economy contributed to the success of the CAD business in front of a major release. Could it possibly be that people now wanting to buy Creo, and that's why they're buying the older version before it gets released?"

PTC: "I want to remind you kind about the facts because it's probably hard to remember all the stuff. We used to have 3 discrete products:

- Pro/ENGINEER
- CoCreate
- ProductView.

"In Creo, we came out with the new concept that blends these three together in a pretty interesting way. So Creo is actually the successor of the three product families.

"Pro/ENGINEER and CoCreate were never cross-sold in the past. Because all three of these products are now upward compatible to Creo, we went back and renamed:

- Pro/E to be Creo Elements/Pro
- CoCreate to be Creo Elements/Direct
- ProductView to be Creo Elements/View.

"So those are the three products we're selling today, and what's happened is suddenly, we're seeing a tremendous amount of cross-sell. We are seeing the Parametric customers who formerly had Pro/ENGINEER begin to buy the Direct product, formerly known as CoCreate, and vice versa in particular.

"We're seeing a cross-sell having been unleashed in anticipation of a unifying product that actually blends the two together in a more perfect way. But I don't really want to take it away from that fact people are hiring more mechanical engineers, and they simply need more seats as well. So it's really probably, first and foremost, better economy, secondarily, maybe a third of the factor, is the cross-sell that we've unleashed in anticipation of the unification."

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Dassault vs PTC:

Analyst: "The more involved question is about wanting to get your updated view on the market growth rates in the CAD and the PLM segments. The backdrop for this would be just looking at organic growth rates from you guys versus Dassault. We don't have the UG [Siemens PLM] numbers. You guys were ahead of them last year in growth, and PLM really drove that. The last couple of quarters, they pulled even pretty much on those organic constant currency growth rates.

Analyst: " We're looking at the combined IBM-Dassault, 12 months ago versus what they're doing now, so that's somewhat of an organic calculation. I'm wondering what you think the PLM growth rate is there about the market and for you guys, and same question for CAD."

PTC: "Looking backwards, it's sort of been the upper single-digit 9%, 10%, 8% to 10%, let's say, percent growth for the PLM industry, and CAD's probably been 3% to 5%. We have been a strong over-performer in the PLM segment because we've had a 17% growth CAGR [Compound Annual Growth Rate] for many years, while the industry was growing 8% or 9%. So we've doubled industry growth historically in PLM.

"We probably lagged industry growth in CAD by 1% or 2%, maybe the industry was growing 4%, and we were growing 2% or 3%, during much of that period -- 2009 aside, when nothing was growing for anybody.

"Going forward, we think we're going to continue taking market share in PLM. We didn't necessarily take any this quarter, but this quarter we probably took a lot of market share in CAD, certainly from a revenue standpoint. I would expect that this phenomenon of explosive growth in CAD will probably temper itself a bit over time.

"And that the growth in our Windchill PLM business will accelerate again. And I think we'll probably get back to a situation where we're a low teens organic grower based on a Windchill rate greater than low teens. And a CAD rate probably in mid -- currently, I believe, mid upper digits for some time now -- mid to upper single digits."

Analyst: "Can you explain how you will differentiate MKS from the embedded systems functionality that Dassault has?"

PTC: Dassault formerly had no capability in this area. They, maybe a year ago, acquired a little company called Geensoft. I think it's $1 million revenue company based somewhere in Europe. So Dassault bought a small little player who has stitched together some open source products.

"We bought the industry leader, or in the process of acquiring the industry leade, who's doing $75 million in revenue. I suppose you could say the two compete, [but] we have the industry-leading platform, the best technology, the most customers, the broadest footprint, the number one position by a factor of 10. So that's how I would characterize it, Dassault will be a competitor, but we think they're not necessarily a strong competitor."

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